AICPA Proposes Amendments to Materiality Standards

The AICPA’s Auditing Standards Board (ASB) has issued an exposure draft of a proposed Statement on Auditing Standards (SAS) and a proposed Statement on Standards for Attestation Engagements (SSAE), Amendments to the Description of the Concept of Materiality. Both exposure drafts are included in the same document and have the same title. Comments are due by August 5, 2019.

Materiality Definitions

The proposals, if adopted as proposed, would amend various AU-C and AT-C sections in AICPA Professional Standards. They would align the materiality concepts of the AICPA Professional Standards with the definition of materiality used by the U.S. judicial system and the PCAOB, SEC and FASB. The current ASB materiality standard is consistent with those of the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB).

The ASB believes that eliminating inconsistencies between the AICPA standards and the definition of materiality used by the U.S. judicial system and other U.S. standard-setters and regulators would be in the public interest.

The current ASB, IASB and IAASB standards provide that “misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements” (emphasis added by the AICPA in the exposure draft Background section).

In contrast, the definition used by the U.S. judicial system, standard-setters and SEC provides that “an omission or misstatement” is material “if there is a substantial likelihood that a reasonable person would consider it important” (emphasis added by the AICPA in the exposure draft Background section).

Affected Auditing and Attestation Standards

Under the proposal, the definition of materiality would provide that: “Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment of a reasonable user made based on the financial statements.” The focus of the revised definition would be on whether the misstatement would have a “substantial likelihood” that it “would influence the judgment” of a reasonable user.

The proposed revisions would modify the following auditing standards:

  • SAS 122, Statements on Auditing Standards: Clarification and Recodification, as amended;
  • SAS No. 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements; and
  • SAS No. 13X, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. The AICPA expects to issue SAS 13X in the third quarter of this year.

The proposed amendments would amend the following sections of SSAE No. 18, Attestation Standards: Clarification and Recodification:

  • AT-C section 205, Examination Engagements; and
  • AT-C section 210, Review Engagements.

Proposed Effective Dates

The ASB expects that the effective date for the proposed SAS and SSAE amendments will be for audits of financial statements for periods ending on or after December 15, 2020 or practitioners’ reports dated on or after December 15, 2020, respectively. It is possible that the proposed effective date may change, but the ASB has advised that the amendments will not be effective earlier than December 15, 2020.

 

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